The Real Cost of a Bad Hire

Breaking Down the High Cost of a Bad Hire

A quote that we live by here at Newton states, “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.” Although this phrase was coined by Red Adair, the famous oil well fighter who gained fame in the ‘50s and ‘60s, its message has transcended the boundaries of time and profession, and is seemingly even more relevant today than ever.

As the economy continues to shift to one dominated by data and knowledge intensive jobs, there has been a parallel shift to focus on hiring the most talented people. For proof of this, one must look no further than the most visionary business leader of our time:

“The secret of my success is that we have gone to exceptional lengths to hire the best people in the world.” -Steve Jobs

With this emphasis on hiring the most talented professionals possible, recruitment activities have been thrust to the forefront of business leadership strategy everywhere. Unfortunately, as employers race to hire top “talent,” studies show that few businesses actually have the processes in place to do so effectively. According to PwC, 93% of CEOs recognize a need to refine their talent management strategy, but an alarming 61% have yet to take the first step in doing so.

So What are the Implications for Employers?

When organizations push to grow their teams, while lacking an effective recruitment strategy, bad hires become inevitable. Based on a report from Glassdoor and the Brandon Hall Group, it was found that 95% of employers admit to suffering from at least one bad hire every year. Of course, everybody knows that a bad hire is costly. However, recent studies are beginning to uncover just how costly a bad hire can be and the results are startling.

The Cost of a Bad Hire by the Numbers

According to research carried out by Dr. Gary Kustis, an Industrial Psychologist and Management Consultant with decades of experience advising firms on recruitment processes (not to mention the co-host of our upcoming Bootcamp, “How to Hire a Successful Recruiter”), 80% of an organization’s turnover is caused by bad hires. Furthermore, Dr. Kustis found that the average cost of a bad hire is 2-3 times the salary for that position. At first glance, this number may seem overly exaggerated. However, as Dr. Kustis explains, the detriment of bad hires does not only stem from the direct costs associated with them. Bad hires carry significant indirect costs as well, which can greatly hinder organizations.

Direct Costs of a Bad Hire

Dr. Kustis defines direct costs of a bad hire as resources spent on recruitment, interviewing, training, bonuses and severance. There are also fees associated with wasted salary, tax withholdings, and unemployment. CareerBuilder has conducted extensive research into the direct costs of a bad hire. Through their work, they found that 41% of employers who made a bad hire said that the direct cost was over $25,000, while 24% reported a direct cost of more than $50,000.

Indirect Costs of a Bad Hire – The Ripple Effect

There is no doubt that bad hires lead to a significant and direct monetary loss. However, what about the other “indirect” costs that Dr. Kustis refers to as losses in productivity, morale, job knowledge, reputation, work quality and customer satisfaction? Surprisingly, it may be the ripple effect from these consequences that prove to be far more costly than the tangible money directly associated with bad hires.

Causes of the Ripple Effect

So what is it that makes a bad hire have such a large ripple effect? For one thing, hiring is an incredibly collaborative process, often times involving several recruiters, hiring managers, executives and other team members. This means that when there is a bad hire, the time and resources wasted are multiplied across various departments and individuals compounding the effects.

Additionally, hiring someone is not a one-time business transaction. Going through the process of sourcing, interviewing, and hiring – this is just the tip of the iceberg. The significant investments are made once a new hire joins the team. Organizations must constantly put time and resources into a new employee to ensure that they fully develop into their role (business leaders estimate this initial onboarding cost to be around $240,000 per employee). Unfortunately, when a new employee turns out to simply be a bad hire, this extensive investment is utterly wasted.

Added to this wasted time is the reality that a bad hire will not carry their weight. Inevitably, the rest of the team is going to feel the burden of this. Greg Scileppi, President of international staffing operations at Robert Half, addresses this point by explaining, “Hiring a bad fit or someone who lacks the skills needed to perform well has the potential to leave good employees with the burden of damage control, whether it be extra work or redoing work that wasn’t completed correctly the first time.”

Fallout From the Ripple Effect

Factor in all of these variable indirect costs, and it becomes clear that a bad hire can have a seriously negative impact on employee morale and organizational productivity. In fact, based on a CareerBuilder study, 39% of employers identified loss in productivity as the number one cost of a bad hire, with 33% identifying a lowered employee morale. Furthermore, Robert Half found the following:

Supervisors spent 17% of their time, or about one day a week, managing bad hires

39% of CFO’s reported that bad hires cost them in productivity

95% of CFO’s reported that a bad hire affects team morale, with 35% saying that it is greatly affected

Leading Reasons for Making a “Bad Hire”

With high costs so evident, why do organizations continue to make bad hires? CareerBuilder looked into this and uncovered the following leading reasons for a bad hire:

43% – Needed to fill the job quickly

22% – Insufficient talent intelligence

13% – Sourcing techniques need to be adjusted per open position

10% – Fewer recruiters due to the recession have made it difficult to go through applications

69% of employers reported that a bad hire was the result of a broken interview process

Companies that lack a standard interview process are 5 times more likely to make a bad hire

Avoid Bad Hires by Hiring the Right Recruiters

From the research above, the cost of one bad hire becomes more clear. However, imagine if the next bad hire at your organization was responsible for making subsequent hiring decisions. You know the saying, “one bad apple spoils the bunch?” It becomes extremely applicable if a bad hire turns out to be involved in the recruitment activities at your organization. In this case, the fallout from that one bad hire is compounded by each new hire that they make going forward. Zappos founder Tony Hsieh realized the cost of this exact mistake within his own organization. In this interview, he explains his belief that the fallout from bad Zappos hires, and their subsequent bad hires, cost his company over $100 million!

So as an employer, what must you do to avoid this? First and foremost, it is vital that you hire the right recruiters to manage and carry out an effective talent acquisition strategy. Successful recruiters will have the processes in place to source, assess, and hire the top talent. By way of these processes, the right recruiter will enable your organization to steer clear from costly bad hires.

Simple enough, right? Just get out there and hire some great recruiters. Actually, not so fast. Remember, recruiters built their careers by playing this game. They will know exactly how to leverage their strengths and mask their weaknesses to appear as the ideal candidate for the position that you are hiring for. For this reason, a recruiter is the most difficult position to hire for and recruiting the right recruiter is somewhat of an artform. Luckily, here at Newton, we have decades of experience in perfecting this art and we are eager to share it with you!

Check out our July Bootcamp, “How to Hire a Successful Recruiter”

In it, Newton co-founder and recruiting expert Joel Passen is joined by Industrial Psychologist and Management Consultant Dr. Gary Kustis and discuss their insights on “How to Hire a Successful Recruiter.” Dr. Kustis is an expert in this field with decades of experience building out assessment based selection processes.

In the session, the two share their top secrets for creating a foolproof recruiter selection process, including:

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